Tuesday, September 29, 2015

The Commission could not compel former bank employees to divulge the secret passcodes they devised for smartphones issued to them by their former bank employer because the codes were the employees’ personal thought processes and not business records that can be compelled over Fifth Amendment objection (SEC v. Huang, September 23, 2015, Kearney, M.).

Background. The employer bank provided the defendants with the smartphones, but the employees were to create the passwords to access them. According to the court, the bank also requested that employees not keep records of these personal passcodes for security reasons. When they left the bank, the former employees returned the smartphones, and the bank gave the phones to the Commission as part of an insider trading investigation of the employees.

The SEC believes that the phones contain information germane to their investigation but cannot access the data without the defendants’ passcodes, so the Commission filed this motion to compel them to relinquish the codes. The SEC unsuccessfully argued that, as former bank data analysts, the defendants are corporate custodians in possession of corporate records, so they cannot assert their Fifth Amendment privilege in refusing to disclose their passcodes. The former employees disagreed with this characterization and claimed that providing the passcodes to their phones is "testimonial" in nature and that compelling them to do so violates the Fifth Amendment.

Former employees prevail. Each party relied on case law to establish its claims, all non-smartphone scenarios involving the interplay between corporate records and encrypted information on computers. The Commission claimed that corporate records cases govern the analysis and that corporate custodians may not invoke the Fifth Amendment to avoid producing corporate records.

But the court found the former employees’ characterization more on point. The court focused not on whether the privilege applies to underlying documents, but on whether the acts of decryption and production were testimonial and found that it was in this case. The SEC is not seeking business records, the court said, but rather the defendants' personal thought processes, so the defendants may properly invoke their Fifth Amendment rights.

No foregone conclusion. The Commission then argued that the "foregone conclusion" doctrine applies to override the former employees’ invocation of the Fifth Amendment privilege. That doctrine states that an act of production is not testimonial if the proponent can show with "reasonable particularity" “at the time it sought to compel the production, it already knew of the materials, thereby making any testimonial aspect a ‘foregone conclusion.’” Once again, the court disagreed. That doctrine applies when the contents are known. Here, the Commission only surmised that there was relevant information on the smartphones and this was insufficient, the court said. Accordingly, the court ordered that the former employees could not be compelled to provide their passcodes.